Despite Germany, euro zone sinks towards recession

BRUSSELS Strong production in Germany could not make up for a slump across the rest of the euro zone in March with declining output at factories falling and signaling an oncoming recession may not be as mild as policymakers hope.

Industrial production in the 17 countries sharing the euro fell 0.3 percent in March from February, the EU's statistics office Eurostat said on Monday.

The figures stood in contrast with German data showing output in the euro zone's largest economy up 1.3 percent for the month, according to Eurostat, 2.8 percent when energy and construction are included.

"With the debt crisis, rising unemployment and inflation above 2 percent, household demand is weak and globally economic conditions are sluggish, so that is making people very reluctant to spend and invest," said Joost Beaumont, a senior economist at ABN Amro in Amsterdam.

Eurostat says output fell 1.8 percent in Spain and in France, the euro zone's second largest economy after Germany, output was down 0.9 percent for the month.

The Netherlands saw a decline of 9 percent, but that was after a huge jump in the previous month.

Many economists expect Eurostat to show on Tuesday that the euro zone entered its second recession in just three years at the end of March, with households suffering the effects of austerity programs aimed at cutting debt and deficits.

"Industrial production is a timely reminder that first-quarter GDP will likely show a contraction," said Martin van Vliet, an economist at ING. "With the fiscal squeeze unlikely to ease soon and the debt crisis flaring up again, any upturn in industrial activity later this year will likely be modest."

European officials have repeatedly said the slump will be mild, with a recovery in the second half of this year. But the strong economic data seen in January has unexpectedly faded and business surveys point to a deeper downturn, with the drag coming from a debt-laden south, epitomized by Greece, Spain and Italy.

"HIGH ALERT"

Economists polled by Reuters last week estimated the euro zone economy shrank 0.2 percent in the first quarter, after shrinking 0.3 percent in the fourth quarter of last year.

"We suspect that a further slowdown in the service sector meant that the wider economy contracted by around 0.2 percent last quarter," said Ben May, an economist at Capital Economics in London. "What's more, April's disappointing survey data for both the industrial and service sectors suggest that the recession may continue beyond the first quarter."

EU leaders will meet in Brussels on May 23 to try to map out ways the euro zone and the wider European Union can return to growth while still cutting debts and deficits, but economists and investors say there is little room to maneuver.

"In addition to 'high alert and forceful' crisis management, Europe still needs to articulate more clearly its longer-term game plan," Erik Nielsen, Unicredit's global chief economist, wrote in a note to clients on Sunday.

In terms of the March output data, economists said the performance underlines the weak demand for goods such as machinery and consumer products, as the currency area suffers from the impact of a two-year debt crisis that has driven unemployment to a record high.

On an annual basis, factory output sank 2.2 percent in March, the fourth consecutive monthly slide, Eurostat said, and only Germany, Slovenia and Slovakia were able to post growth.

(Reporting by Robin Emmott; editing by Rex Merrifield/Jeremy Gaunt)

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